China Politics Weekly
China Politics Weekly aims to keep business leaders, investors, diplomats, scholars and other China hands up to date on important trends in China. It is produced by Trey McArver, a London-based consultant providing advice and intelligence to firms and investors engaged in China and the region. You can find out more about Trey and CPW in this interview.
Issue No. 60 – July 6, 2015
As expected, the NPC Standing Committee passed a new National Security Law at the close of its weeklong meeting Wednesday. As feared, the law retains the sweeping definition of national security contained in earlier draft. The broad scope of the law makes almost any activity potentially subject to national security provisions.
The sweeping definition of national security is so broad as to be almost meaningless. Such vague and unfocused legislation is a disappointing sign for Xi Jinping’s rule by law reforms that seek to standardize and systematize the business of government. Instead, the law gives little concrete guidance on the responsibilities of state and non-state actors regarding national security. This makes the law vulnerable to arbitrary enforcement, increasing uncertainty for those operating in China.
As mentioned in last week’s newsletter, the NSL serves as an important litmus test for China’s approach to foreign investment. Foreign businesses and governments lobbied aggressively to have various pro-state, anti-market language either removed or softened. These included provisions for national security reviews of foreign investment.
Unfortunately, it seems that none of the foreigners’ suggestions were heeded; if anything, the final version of the law is even more expansive (and less pro-business) than earlier drafts. It reinforces an impression of growing anti-foreign sentiment that is present in several other pieces of legislation currently in drafting, including the Foreign Investment Law and Foreign NGO Management Law. The negative views towards foreign involvement in China’s economy (and society more generally) call into question commitments to further opening of the economy. Hopes for conclusion of robust bilateral investment treaties (BIT) with the US and EU look increasingly misplaced.
The debates within China on the utility of open markets and foreign participation are far from over. But the NSL is evidence that, for the moment, conservatives are in the ascendant in Beijing.
I pledge allegiance
The NSL was not the only item on the legislature’s agenda. The NPC also decided to require officials to pledge allegiance to the Constitution when taking power. The oath is as follows: “I pledge to be allegiant to the Constitution of the People’s Republic of China, safeguard the Constitution authority, perform obligations given by the laws, be loyal to the country and people, be committed and honest when performing duties, accept people’s supervision and work hard to build a socialist country that is prosperous, strong, democratic, culturally advanced, and harmonious.”
Power to the people (and their procuratorate)
The meeting also saw authorization of a two-year program that will allow the Supreme People’s Procuratorate to institute public interest litigation in civil and administrative cases in 13 provinces.
Prosecutors will be allowed to file civil lawsuits where public rights and interests have been compromised by pollution or lack of food and drug safety. Administrative suits can be filed where administrative power has been abused in relation to environmental protection, state assets and state land use.
The new program marks the gradual expansion of public interest litigation in China. It builds upon a 2012 amendment to the Civil Procedure Law that first allowed organizations to bring litigation against those who undermined public welfare by polluting or infringing on consumers’ interests. Public interest litigation was given a further boost by the amended version of the Environmental Protection Law passed in April that allowed environmental NGOs to file public interest suits.
What we need is another new bank, preferably one to fund investment in developing countries
Ratified an agreement on the agreement on the founding of BRICS New Development Bank. China’s ratification paves the way for the bank to be officially established at the upcoming BRICS Summit to be held this week in Ufa, Russia.
The NPC also ratified a criminal transfer treaty with Kazakhstan and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
China’s environmental protection agenda continues to gain momentum. Last week’s meeting of the Leading Small Group on Comprehensively Deepening Reform (LSGCDR) focused on the issue. According to Xinhua, the meeting discussed “an environmental protection supervision plan for building a better monitoring network, a plan for independent auditing of officials of natural resource assets and a plan to hold officials who damage the environment responsible, among others.” This follows on the heels of the recently released Opinions on Further Promoting the Development of Ecological Civilization, which promises increased incorporation of environmental performance in cadre evaluations.
China also submitted its commitments in advance of the UN climate change talks scheduled for Paris in December. More or less restating commitments that China has already made in other fora (most notably last November’s joint statement with the US), the submission nonetheless positions China as an active proponent and global leader on climate change. This rising international profile will be used by officials at home to further advocate for aggressive pollution control and environmental remediation measures.
Investment-led growth: just what the global economy needs?
Premier Li spent much of the week in Belgium and France, where he continued to promote cooperation on production capacity. The policy attempts to export China’s overcapacity in traditional industry while also developing more high-tech, high value-added industries.
The policy makes a lot of sense for other countries as well. Developed economies like that of the EU and North America are desperate for upgrades to their creaking infrastructure. With interest rates at historically low levels, it’s a great time to borrow money. Nobody does infrastructure cheaper than the Chinese, so why not get a loan, buy some Chinese equipment and hire a Chinese firm to build some roads? As Li said in Brussels, “Infrastructure development is the point of entry for global cooperation on production capacity”. I think he’s probably on to something.
Issue No. 61 – July 13, 2015
Obligatory note on the stock market
Plenty of ink has already been spilled on this (and I’m sure we haven’t heard the last of it), but since everybody is asking me about it, here are a few short thoughts:
- The government overreacted, but they had to once they started doing stabilizing measures in late June. Their credibility was at stake.
- No matter what they did, they couldn’t immediately halt the slide because of all the margin traders unwinding their positions. This took time (and is perhaps ongoing?) because so many stocks are suspended.
- Just because they intervened so heavily does not mean that they have jettisoned their reform agenda. It does, however, mean that stability bias is strong.
- You should buy Chinese equities. We may not have reached the bottom of this correction, but regardless it’s a safe bet that the SCI will reflate in the short to medium term. There are a lot of reasons, but the most important are the fact that the government clearly wants to encourage a strong market, and there will be a lot more money flowing into Chinese markets both from domestic and foreign investors.
I’ve got plenty more to say, so if you want a more detailed analysis, get in touch.
An excerpt from a recent piece in the Nikkei Asian Review on China’s National Security Law:
The new law is a disappointing development from an administration that, at times, has espoused insightful and ambitious solutions to China’s problems. The anti-corruption campaign was a much-needed attempt to cleanse a party whose venality had spun out of control. Liberalizing economic reforms spearheaded by Premier Li Keqiang and other economic technocrats have offered a clear path towards structural reforms that would put the economy on a firm footing. But the security law suggests that liberal-minded technocratic policymakers have been overtaken by much more conservative elements in Beijing.
On the upside, however, the vagueness of the law leaves much room for interpretation, and subsequent laws and regulations could serve to ameliorate its conservative tendencies. Perhaps more than any other, China’s political system is constantly in a process of change, so the security law should not be taken as the final word on any of the governance issues it addresses.
But in a system that is constantly evolving, it is important to identify guideposts that indicate the direction of change. While not the final word, the security law shows us that China is heading in a more conservative, closed and statist direction. This is not good for China’s security, or that of any other country.
Speaking of growing conservatism, the Party Central Committee for the first time held a conference this week on improving mass organizations. Xi attended the conference, saying, “Under new circumstances, the work of mass organizations should be improved, not weakened or allowed to stagnate… Mass organizations must maintain a high degree of unity with the CPC Central Committee in thoughts, politics and deeds, and strictly observe political discipline and rules”.
What are mass organizations you ask? The four biggest are the All-China Federation of Trade Unions, Communist Youth League, All-China Women’s Federation and All-China Federation of Industry and Commerce.
Party efforts to promote mass organizations are closely tied to United Front work, which has also received heavy emphasis under Xi. The result is a steady extension of Party influence and control into ever more aspects of Chinese society.
An ever-expanding Party is in sharp contrast to the small government initiatives at the heart of Premier Li Keqiang’s policy agenda. On Wednesday the Central Committee and State Council released the Overall Plan for Separation of Industry and Commercial Associations from Administrative Bodies. The plan says that:
- state funding for industry associations will be phased out by 2018;
- associations currently housed within government departments will be required to find new headquarters by 2017;
- government departments will no longer have control over personnel decisions in industry associations; and
- government employees will be prohibited from working in such associations. Senior officials will not be allowed to work in associations in the first three years following retirement.
Industry associations play an important role in China’s policymaking, often drafting standards and industry-specific Five-Year Plans. Separating them the government should give broader scope for outside voices to contribute to policymaking.
New world order…
There is an increasingly popular (if highly contested) narrative that the current US-led global order is in the midst of disintegration. Those who ascribe to this view would no doubt find further evidence for their position from events this week in Ufa, Russia. Ufa hosted leaders from the BRICS and Shanghai Cooperation Organization (SCO) member and observer countries for summits of both organizations. The two organizations are growing in prominence; as they do, so does China’s influence in the region and the world.
…strengthens old world order.
But China’s aggressive diplomacy has provoked a backlash from some neighboring states, particularly in Northeast and Southeast Asia. Vietnamese Communist Party (VCP) General Secretary Nguyen Phu Trong visited the United States this week, the first VCP to ever do so. Nguyen was feted in Washington, in large part because both countries wanted to send a message to China that its ambitions in the region will not go unchecked.
Similar signals came out of Indonesia this week where reports said that the Indonesian military is planning to build a new base in the South China Sea.
Asia is a dynamic region where traditional powers the United States and Japan are in relative decline. As China (and other countries in the region) continue to grow and become more assertive we should expect to see a lot of active diplomatic and military maneuvering as all actors in the region seek to optimally position themselves in a changing environment.